An Economic Exploration of Firm-level ESG Performance

We test for linear and nonlinear effects of corporate social responsibility (CSR) on both operating and market-based indicators of firm performance in a Scandinavian context. We also examine the combined effects of environmental, social, and governance (ESG) investment. Our findings suggest a neutral linear aggregate ESG–operating performance relationship, a positive relationship for environmental and social responsibility, yet a negative relationship for governance. These effects are industry and country specific. The surprise in our findings is that we find systematic evidence of negative relationships, generally independent of industry and country for stock performance. We explain this with a “warm-glow” effect as described in recent financial economics literature, whereby investors derive altruistic utility from ESG investments, reducing excess stock returns, and lowering the firm’s cost of capital. Investor altruism, alongside the low variance explained by our operating models, and indeed extant literature, leads us to conclude that we may have an explanation for why firms increasingly invest in CSR.